Abstract

http://ssrn.com/abstract=2413332
 
 

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Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities


Nicole M. Boyson


Northeastern University - D’Amore-McKim School of Business

Rüdiger Fahlenbrach


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Rene M. Stulz


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

March 2014

NBER Working Paper No. w19984

Abstract:     
We propose a theory of regulatory arbitrage by banks and test it using trust preferred securities (TPS) issuance. From 1996 to 2007, U.S. banks in the aggregate increased their regulatory capital through issuance of TPS while their net issuance of common stock was negative due to repurchases. We assume that, in the absence of capital requirements, a bank has an optimal capital structure that depends on its business model. Capital requirements can impose constraints on bank decisions. If a bank’s optimal capital structure also meets regulatory capital requirements with a sufficient buffer, the bank is unconstrained by these requirements. We expect that unconstrained banks will not issue TPS, that constrained banks will issue TPS and engage in other forms of regulatory arbitrage, and that banks with TPS will be riskier than other banks with the same amount of regulatory capital, and therefore, more adversely affected by the credit crisis. Our empirical evidence supports these predictions.

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Number of Pages in PDF File: 50

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Date posted: March 24, 2014  

Suggested Citation

Boyson, Nicole M. and Fahlenbrach, Rüdiger and Stulz, Rene M., Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities (March 2014). NBER Working Paper No. w19984. Available at SSRN: http://ssrn.com/abstract=2413332

Contact Information

Nicole M. Boyson (Contact Author)
Northeastern University - D’Amore-McKim School of Business ( email )
360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)
Rüdiger Fahlenbrach
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
Switzerland
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)
HOME PAGE: http://sfi.epfl.ch/fahlenbrach.html
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Rene M. Stulz
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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